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Saturday, February 21, 2009

Obama's Budget Proposal

by Calculated Risk on 2/21/2009 04:07:00 PM

From the WaPo: Obama to Unveil an Ambitious Budget Plan

Even before Congress approved the stimulus package earlier this month, this year's deficit was projected by Congressional budget analysts to approach $1.2 trillion, or 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say the annual gap between federal spending and income could approach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, ... Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers ...

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year.
For several years I've complained about the Bush structural budget deficit, and the lack of fiscal flexibility once the inevitable housing bust arrived. Now that the bust is here, we are seeing the full impact of that flawed fiscal policy. Ouch.

A $2 trillion annual budget deficit is possible. And even after the U.S. economy bottoms (it will happen someday), the recovery will probably be very sluggish, keeping the deficit extremely high for years. I doubt that the the budget deficit will be cut to $533 billion in fiscal 2013.